Better Buy: Altria or Philip Morris International?

Universal Corp. (NYSE: UVV) can supply the raw product; Reynolds American (NYSE: RAI) can pretend with its Camel brand; China National Tobacco can claim victory in China. But there's only one King of Tobacco.

It's the maker of Marlboro (among other tobacco products). However, two sister companies share the brand -- Altria (NYSE: MO) in the U.S. and Philip Morris (NYSE: PM) internationally.

Let's settle this sibling rivalry and determine which is the better buy. Here's a tale of the tape:

Round 1: CheapnessAdvantage: Altria. On a trailing basis, Altria beats its rival Philip Morris International. This advantage holds on a forward basis, too. On an absolute basis, both trade at reasonable multiples, factoring in their brand recognition and their litigation risk.

Round 2: GrowthAdvantage: Philip Morris International. Growth here is the forward five-year EPS growth rate. Since the Marlboro brand already dominates domestically. Altria's brands have around a 50% market share, and it makes sense that growth is more heady internationally, where Philip Morris has a 16% market share.

Round 3: OperationsAdvantage: Philip Morris International. The international unit produces a whopping $0.25 for every dollar of sales. Quite impressive by any standard.

Round 4: Balance sheetAdvantage: Altria. Both companies are highly levered, but they both also have the cash flows to back it up.

Round 5: CAPS ratingAdvantage: Philip Morris International. The Motley Fool's CAPS community likes both stocks, but it gives Philip Morris International its highest rating -- five stars. You can get more information on each stock by clicking over to our CAPS area.

The numbers paint very similar pictures for Altria and Philip Morris International. Although Philip Morris International squeaks out a victory, investors who like one are very likely to like the other -- they were one company at one point, after all.

Comments from our Foolish Readers

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What do they have to spend money on? Whatever the government and the courts tell them to spend it on. I don't think I'm unique in being intolerant of the political and legal risk in Altria. I realize we are in a period when that seems to have receded, but it could return when least expected in this country of ours with a really crazy tort system.

In other countries, when somebody buys and uses a product whose package is covered with warnings, they are assumed to have been warned and accept responsibility for using the product, but not here. I therefore want nothing to do with an inherently dangerous product like cigarettes in this country. Overseas is another matter. I own PM and BTI as well.

I like PM due to it's international exposure. I feel that there is probably a lot less potential litigation and regulations outside the USA. Other then that I think they are both good deals now. My basic worry regarding MO is the government regs and lawsuits here in the USA. In Europe, as previously expressed, a warning on the package gets PM off the hook for lawsuits. Hey, at any time all this all could change - like anything else!

I sincerely believe that the legalization of marijuana is but a few years away - first: medicinal, then: recreational. As evidence, I point to the new relaxations in every state, every year. When that happens, private MJ growers will become background noise - like private winemakers, private brewers and private tobacco growers. Scale, distribution and government security requirements will rule the market.

The question becomes: Who now has most of what will be required to grow, distribute and control? Big tobacco, of course!

Very few talk about it, but I think that legalizing MJ is the gorilla in the room, and it is much more a question of "how" than "when".

I'm not worried about the political risk. Altria was founded 25 years ago and knows the rules of the game in US litigation. Nothing new here that hasn't come up before in the last 2-3 decades.

There is another, non-financial factor holding

down this company's potential price: many US investors do not want to buy a company that produces cancer sticks. This holds MO's valuation to below what it could/should be.

Lastly, YoungDude brings up a key point. MO is much more established in the US than PM is internationally. As such, it is able to maximize value to shareholders via its dividend payout. This is the reason that I like Altria more than PM. The cigarette market is (personal opinion) not growing fast enough anywhere in the world to support building new factories or significant capital investments. So the money is made by raising prices to outpace volume declines, and paying the profits out as dividends.